The importance of Corporate Governance (from sprats to whales)

Addressing corporate governance challenges

Chartered Accountants ireland

When trying to develop a high-performing board, there are some of the key governance challenges that need to be addressed before you get started. Here are some things you should look keep in mind when assembling an effective board.

Leadership from the top on ethics and values

The Italians say that “a fish rots from the head”. Well, organisation do too. If the Board is not taking a leadership position on developing the ethics and value of an organisation, there will be no moral compass to help guide the behaviours of management and staff. It’s the board’s responsibility to document the ethics and values of the organisation and identify the associated behaviours that are appearing in the organisation.

Implementation should be done at induction for new staff, embodied in all communication and training materials and, of course, espoused by the board and senior management at all times.

Fit for purpose governance structures

Governance structures should be appropriate and proportionate to the size and stage of development of an organisation. Key factors in determining these will include the size of the board, the amount of executive and non-executive members, the rotation policy, and committees.

It is the role of the chair, with input from the board and the company secretary, to map out how the governance structures should evolve over time. Good governance should enhance company performance.

Strategic board renewal

Unless a company has the skills and experience around the table to support the strategic direction of the organisation, then it is unlikely to succeed. The most important function of a board is to ensure that it recruits the talent to enable the company to succeed. This will mean careful attention to succession planning at board and senior management level. As a company grows and develops, it will need different skills, such as scaling, capital-raising, experience in entering new markets, etc. Board renewal and the timing of it will be of paramount importance to ensure a seamless transition at board and senior management level.

Increased diversity broadens perspectives

The evidence strongly suggests that diverse boards are better boards and are more likely to create greater shareholder value. In McKinsey’s latest report, Diversity Matters, it found that companies in the top quartile for racial and ethnic diversity are 35% more likely to have financial returns above their respective national industry medians.

A key factor in board renewal is ensuring that the diversity of the board and senior management is appropriate to the business of the organisation. An organisation selling female fashion with an all-male board in ethnically diverse country is unlikely to succeed compared to a more diverse board. Diversity takes many forms, including gender, ethnicity, geography, age, skill sets etc.

Increasing the quality of information for the board

A board cannot perform its role unless it gets the right information. The information reported to the board should enable it to assess performance against its strategic plan, its annual business plan and budget. Without this basic information, a board will be at sea. The board should assess annually the information its gets to ensure it is getting what it needs to perform its role.